Greedy Geezers, Reconsidered

For three decades, conservative critics have been warning that the elderly are living too well at the expense of the young. Since the early 1980s, financier Peter G. Peterson has been predicting that Social Security’s excessive generosity would crash the retirement system and the economy. The late British journalist Henry Fairlie, in 1988, famously wrote a piece in The New Republic with the cover line “Greedy Geezers,” faulting the elderly for living too well at the expense of the young.

(Seymour Chwast)

Thanks to the economic boom of the late 1990s, senior bashing went into temporary eclipse. With full employment and rising wages, payroll tax receipts swelled the Social Security trust funds. In the three years between 1997 and 2000, the system’s projected year of reckoning—when it could no longer pay all of its claims—receded by eight years (from 2029 to 2037). At that rate, Social Security would soon be in perpetual surplus. All it took to balance the system’s books was decent wage growth, since Social Security is funded by taxes on wages. The government’s general budget went into the black in 1999, and economists were projecting that the national debt would soon be paid off.

However, the Bush tax cuts, the costs of two wars, an inefficient privatized Medicare drug plan, and the financial collapse of 2008 drove the budget back into deep deficit and gave new life to the Social Security Cassandras. Unemployment soared, payroll taxes plummeted, and a deep economic slump followed. Now, Social Security is once again projected to lack the funds to pay out all of its claims, as early as 2033.

Apart from the cause and cure of Social Security’s projected deficit, there was always one fallacy at the core of the greedy-geezers fable: The vast majority of the elderly are far from wealthy. The median income of elderly Americans in 2010 was just $25,704 for males and $15,072 for females. Almost two-thirds of the elderly depend on Social Security for at least 70 percent of their entire income. The income of the very wealthy elderly is outsize, but that’s hardly a reason for cutting Social Security for everyone else. Peterson contends that “a substantial part of these [Social Security] retirement payments go to people like me”—affluent folks who can do without the money. But according to Michael Hiltzik, a business columnist for the Los Angeles Times, the $1.14 billion in Social Security payments that went to recipients earning $1 million or more in 2009 amounted to less than one-fifth of 1 percent of all benefits paid. If we want government to recapture that money, it’s far better to use the progressive income tax than to cut Social Security benefits across the board.

A huge part of the austerity crusade has been based on moral claims of generational justice. Supposedly, Social Security and Medicare are contributing to the massive public debt that older boomers and retired people are selfishly passing along to their children and grandchildren. As these obligations come due and payable, interest rates and taxes will rise, and future generations will suffer reduced living standards because of our own profligacy and short-sightedness. This story has become a staple of both conservative and centrist political rhetoric. It was the centerpiece of the Bowles-Simpson Commission that President Barack Obama appointed in 2010 to devise a deficit-reduction plan. In The New York Times, moderate liberal columnist Thomas Friedman parrots it, as does conservative David Brooks. The Washington Post editorial page as well as Post financial writers like Lori Montgomery and even the usually liberal Steven Pearlstein take it as gospel. As former Republican Senator Judd Gregg of New Hampshire warned, if the debt is not reduced, “our children will have less of a quality of life than we’ve had. … They will have a government they can’t afford … and we will be demanding so much of them in the area of taxes that they will not have the money to send their kids to college or buy that home or just live a good quality life.”

But the economics of this narrative are just about backward. The well-being of our children and grandchildren in 2023 or 2033 is not a function of how much debt reduction we target or enforce in this decade or how much we slash Social Security and Medicare but of whether we get economic growth back on track. Austerity is exactly the wrong way to restore growth.

If we cut deficits, decrease social spending, and tighten our belts, as the budget hawks recommend, the effect will be to reduce purchasing power in a fragile recovery. The case for deficit reduction rests on the premise that investors fear that deficits will increase inflation. But in a depressed economy, the problem is the opposite—deflation. The government is able to sell 30-year bonds for less than 3 percent interest. If investors were worried about inflation, nobody would take that risk. Despite conservative claims that cutting the deficit will “restore confidence,” businessmen are not hesitating to invest because they’re waiting for a deficit deal. They are hesitating because they don’t see enough willing customers for the products.

If the government cuts the deficit in a still-weak recovery, it will condemn the economy to stagnant growth and flat or declining wages. That will indeed leave the next generation a lot poorer. The existing debt will loom larger relative to the size of the economy, and there will be too few public funds to invest in the education, employment, job training, and research outlays that our children and grandchildren need. It’s not as if the budget hawks are proposing a dollar-for-dollar shift of Social Security and Medicare funds into social investment that serves the young.

There’s an even more basic fallacy in the generational-justice story. In reality, non-rich young people and non-rich elderly are common victims. The same trends that have been devastating for young adults have been harmful for the elderly as well. Both groups have suffered from what Yale political scientist Jacob Hacker calls “the great risk-shift,” though in different ways.

In the past three decades, the young have taken on a trillion dollars of college debt as a result of rising tuition costs and defunded public universities. The homeownership rate is declining among young adults; even in an era of 4 percent mortgages many cannot qualify for home loans because of their existing college-debt load. Entry-level jobs are less likely to pay a decent wage or to have good health and pension benefits than they were as recently as the 1990s. The cost of decent child care is beyond the means of millions of young adults who want to have families. But during the same period, the economy has also turned brutally against the elderly.

The postwar system of traditional “defined benefit” pension plans organized and guaranteed by employers has moved inexorably in the direction of 401(k) plans and other savings schemes that are not pensions at all. In the early 1980s, nearly 60 percent of all American workers had traditional pension plans that guaranteed them a fixed monthly pension check until they died. The more generous plans paid health and pension benefits to spouses as well, and funding them was the responsibility of the employer. By contrast, 401(k) plans shift most of the costs and all of the risks to the retiree. A 401(k) plan is simply a pot of tax-deferred savings. When the money runs out, it’s gone.

Work by Alicia Munnell, former vice president for research of the Federal Reserve Bank of Boston who heads the Center for Retirement Research at Boston College’s business school, has demonstrated that the funds in 401(k) plans are pitifully inadequate. The typical worker on the verge of retirement (age 55 to 64) has just $42,000 in his or her 401(k). If you convert that sum into an annuity, which guarantees a monthly payment as long as you live, it produces about $2,000 a year. The average Social Security benefit is just over $14,000 a year. Try living on $16,000 a year as a retired person.

Meanwhile, the percentage of private-sector workers covered by traditional pension plans declined from 62 percent in 1975 to 7 percent by 2009, according to the Employee Benefits Research Institute. Furthermore, many of these plans are underfunded, because employers tend to overstate the projected rate of return on fund assets in order to reduce the current contributions they have to make. Both public-employee and corporate plans have been cutting benefits. Virtually no newly created corporations since the early 1980s offer defined-benefit pension plans. The remaining traditional plans are the natural targets of corporate raiders like Bain Capital, which take operating companies into bankruptcy, where they can strip their pension plans. Almost every major airline has used this device to cut its pension obligations.

Most public workers still have traditional pension plans, but these are increasingly vulnerable fiscally and politically. Republican governors and mayors have used the budget crisis as a pretext for going after public-employee pension benefits, even though many state and local workers have paid into these plans, often as a trade-off for wages. Many public-sector workers, moreover, are not covered by Social Security. But as private-sector employees have lost benefits, the politics of protecting good pensions has turned against government workers. At a time when private-sector workers have been suffering high unemployment and declining wages, many look askance at the public employee’s decent pension and health benefits. Rather than concluding, “I want what she has,” the citizen is more likely to decide that the public worker has it too good. Public pension plans have also been underfunded, casualties of tax and budget assaults against state and local government and the general economic downturn.

The elderly have been clobbered by recent trends in three other respects. The lingering effects of the financial collapse have led the Federal Reserve to keep reducing interest rates, in the hope of levitating the economy. The medicine has kept the economy from sinking even further into depression. However, the flip side of Fed Chair Ben Bernanke’s low interest rates is low earnings on savings for those on fixed incomes. Rates paid by certificates of deposit and money-market mutual funds are around 1 percent or 2 percent. If you want to invest in a Treasury bond, you might get 2.5 percent. Elderly people who counted on decent yields from their savings are out of luck.

Stocks may or may not pay higher returns, but they are classically investments “for the long run.” The market delivers reliable returns over a span of two or three decades; however, most retired people won’t live two or three decades. Any competent investment adviser will counsel a person over 65 that his or her investment portfolio should be mostly in bonds or cash savings. In this economy, that also means pitifully low returns.

The other prime asset held by the elderly is home equity. But the same financial collapse that led the Fed to turn to record-low interest rates was devastating to home equity. The crash reduced home equity by about $9 trillion, and most of those losses hit ordinary homeowners who never used subprime loans; they were innocent bystanders. When times were good, a senior citizen approaching age 70 might choose to downsize by selling the family home, moving to smaller quarters, and putting the proceeds into a nest egg that could earn a decent return. Now, the same retiree has much depleted capital assets, and the return on them is pitiful.

Although Medicare is blamed for consuming too many resources, that’s mainly the result of the inefficient larger health system in which it resides. America’s largely private system looks for profit centers, not for the most cost-effective care and prevention. Medicare, keep in mind, merely pays bills; the rest of the system is largely commercial. While Medicare’s costs are rising to the taxpayer, from the perspective of a senior citizen, the program covers a diminishing percentage of doctor and hospital bills. Decent private “medi-gap” insurance that covers what Medicare doesn’t costs upward of $2,000 a year. In addition, Medicare premiums keep increasing; Social Security is adjusted for inflation, but in recent years all of those adjustments and more have gone to pay for those rising Medicare costs.

In the high-unemployment economy since the economic collapse of 2008, the percentage of people in the labor force has declined for all age groups with one notable exception. People over age 65, and to an even greater extent over age 72, are increasing their employment, because they can’t afford to retire.

Thus the “greedy geezer” 2012 model.

According to its most recent filings with the Internal Revenue Service, the Peter G. Peterson Foundation has spent just under half a billion dollars to persuade the young that they can’t trust that Social Security will be there for them; that the debts run up by their elders are depriving them of a future; that money spent on the old diverts money spent on the young; and that the single most important public-policy challenge is to reduce the federal deficit, with cuts in Social Security benefits as the centerpiece.

Democrats have protected Social Security so far, but it was President Obama who appointed the Bowles-Simpson Commission. Obama continues to be heavily influenced by the claim of the commission, Peterson, and the media amen-chorus that the United States needs a grand bargain of deficit reduction that includes Social Security and Medicare cuts. Obama came perilously close to embracing this approach in the 2011 budget negotiations and was saved from himself only by the Republican refusal to entertain a nickel of tax increases on anyone. What Democrats have a hard time saying is that cuts in Social Security are not only unjust but unnecessary. According to the 2012 report of the Social Security Trustees, the system’s long-term deficit is about 1 percent of gross domestic product. The slight worsening of Social Security’s projected finances is entirely the result of high unemployment and the deterioration of workers’ incomes. If wages rose with productivity, as they did in the postwar era and briefly in the late 1990s, Social Security would be solvent forever.

In the next Congress, the economy is at risk of a deeper slump caused by premature deficit reduction and needless cuts in Social Security and Medicare. We may be craving a new bipartisanship, but not this brand. The claims of generational warfare and the need for an austerity cure are built on factual fallacies and dubious economics. Despite the pamphleteering of the Peterson Foundation et al., the best way to make sense of the widening schisms in this economy is not old versus young. It is top 1 percent versus everyone else.